Guide to Marine Cargo Insurance-Part 1

  What is meant by Marine Cargo Insurance?

Marine cargo insurance relates to insurance of cargo while they are being transported (with incidental storage) not only by water (sea/river) but also when they are being transported by air, road/rail, post parcel, courier or any combination of the above. In a way the word 'marine' is thus a misnomer.

 

What is meant by 'goods' in Marine Insurance?

The Marine Insurance Act 1906 of UK, for instance, contains a schedule which gives a definition of goods. The term ‘goods’ does not include cargo stowed ‘on deck’ or animals (unless otherwise specifically mentioned in the policy).

It is now recognized by insurers that with growing containerization, ‘on deck’ stowage of containers have become quite common.

It is better to use an “On Deck” clause (there are many versions of this clause some of which are discussed in detail in my book Insuring Cargoes). For the purpose of this article, suffice to mention that a cargo owner should be aware of following:

-The carrier could have issued an under-deck Bill of Lading and yet without the knowledge and consent of the exporter, cargo or the container could have got a deck stowage (some versions of ‘On Deck’ clause addresses this possibility and protect the assured if a cargo is given 'on deck' stowage without their privity).

-Deck stowage of container is acceptable but sometimes a curtain sided container or an open top container with a canvass cover may be given a deck stowage (I have actually seen this happening-a canvas covered open top container stowed on the upper most tier on the deck and being splashed with water even though there was no heavy weather during the voyage). Some ‘On Deck’ clauses specifically mention that such containers stowed ‘on deck’ will be covered only as per ICC (C).

-The Insurer may either charge an Additional Premium to cover ‘on deck’ stowage or cover such stowage only on ICC (C) basis. For some cargo (such as machinery esp. over dimensional) ‘on deck’ stowage might additionally require a pre-shipment survey of stowage and lashing arrangement of deck stowage. This is often expressed as a warranty. In marine insurance a breach of warranty renders the policy void.

-When ‘on deck’ cargo is covered on restricted terms, the insurer should be requested to cover on ICC( C) basis but including jettison and washing overboard. It is better in fact to include the expression  “loss or washing overboard” as sometimes due to heavy weather, goods on deck could simply be lost overboard which is not the same thing as “washed overboard”.

Note: It is more than 100 years since the Act came into force and it is time that the Act is modernized. It is generally a thumb rule in most markets that a marine policy covers only the cargo and not its packing unless the policy provides otherwise. Sometimes expression like “ Urea in jute bags” or “computer in cartons” in the policy is sufficient to argue that the  packing itself was insured. Insuring Cargoes gives a variety of Packing Clauses which can be used for pharmaceutical or electronic goods, in particular.

Who requires Marine Cargo Insurance ?

 Buyers, sellers, import/export merchants, buying agents, contractors and banks-in fact any one engaged in movement of goods.

As to who will buy marine insurance (the seller or the buyer or both) would depend on the Terms of Sale (Incoterms 2000 or 2010, for example). However note that only in CIF and CIP terms there is a contractual obligation to insure. For other terms such as FOB etc there is only a commercial need to insure.

Based on when risk (of loss or damage to goods) passes from the seller to the buyer, one or both the parties would arrange insurance for that leg of the transit where they bear the risk of loss or damage. Thus, in FOB or CFR, the seller might wish to insure the goods till the goods are loaded. Thereafter the buyer may wish to arrange his insurance with his own insurer. There are also Seller's and Buyer's Contingency covers which would be discussed later.

Note: Insuring Cargoes contains a very detailed chapter on Incoterms/insurable interest including the practical difficulties with Incoterms, current international practice of insuring on a warehouse to warehouse basis  irrespective of terms of sale (and the pros and con of doing this). The book also contains a recommended list of covers for each of the Incoterm.

Is self-insurance advisable?

Can a cargo owner decide not to insure his goods? Yes he can! But is it advisable?

Consider the following:

1). Recovery prospects from a carrier is not a substitute for a marine insurance policy for the following reasons:

A.  First it is a question of convenience. For example if you get money from the insurer there is no cash flow interruption. Recovery claims against carriers are very time consuming as you know and this can impact you in case of a large claim.

B.Can the cargo owner rely solely on the Carrier to make good his loss /damage?  The answer is in the negative.  The carrier also has several defences. For example:

-Errors of navigation.
-Acts of God
-War and Strikes
-Perils of the sea
-Fire unless there is evidence of carrier’s privity or fault

C. The Carrier will further limit his liability  per package /per kilogram . For example if the Bill of Lading is governed by the Hague Visby Rules, the maximum liability of the Carrier would be 2SDR per kilo or 667 SDR per package, whichever is greater. In the case of Hague Rules it is GBP 100 per package or unit.

The cargo owner would then have to examine whether this is adequate or not. Second, what is a 'package' itself could be questioned. The classic example is that of a match box within a carton. Is each box a package or each carton or even the container a package? In case of large casualty, there is also a Limitation Fund whereby the carrier will be limit his total liability.

2). General Average (GA) and salvage are two reasons why a trader should never resort to self-insurance. There have been instances where goods were not damaged but a General Average (GA) was declared or salvage services received. In the case of GA a cargo owner will be required to give a cash deposit in lieu of insurer's guarantee. This could be a significant amount and not easy to recover! Further Salvage services are, in a majority of cases, provided as Per Lloyd’s Open Form (No Cure, No Pay) and this requires a salvage security to be given by a firm resident in UK which is recognised by Council of Lloyds. If you are insured, your insurer will ask their Overseas Claim Settling Agents like Dolphin Maritime to provide such a security on their behalf. Thus if there is no insurance, the cargo owner would have to give a cash deposit in lieu of insurer’s guarantee. There are cases where salvage security or cash deposit has been as high as 70% of the invoice value.

Second, when the insurer is involved, they also ensure that cargo interests are represented in arbitration proceedings to determine a fair and reasonable award to the Salvors.  In the case of GA they would have a recovery strategy in place against the shipowners if there is any ground to challenge the general average.

Note: GA and Salvage would be discussed in this series of articles.

3). There have been cases where a number of individual shipments have accumulated due to reasons beyond cargo owner's control. A loss could therefore be beyond the capacity of a cargo owner to bear.

 It makes sense to insure!

 

To be continued